RBC Capital Markets‘s Mark Mahaney reiterates an Outperform on the stock, and a $32 price target, projecting revenue in line with consensus, but at 1-cent beat on the bottom line at 34 cents.

Mahaney sees the quarter as a mix of slowing search query activity and diminished engagement, but higher user count and positive news in display advertising:

U.S. Desktop Search Query Share Declines Continue– Yahoo!’s share of U.S. Desktop Search queries continued to fall, down 130bps Y/Y to 11.4%. 2. Negative comScore Engagement Trends – Both Desktop Page Views/Visitor and Minutes/Visitor continued to decline Y/Y in Q3TD. 3. Positive RBC DAM Report – Results from our proprietary DAM report show overall positive trends for display advertising across Yahoo!’s most important properties with mostly stable sell-through rates. 4. Series of New Acquisitions – Yahoo!’s string of acqui-hires continued in the quarter. Yahoo! bought 7 more small, diverse technology companies (there was no Tumblr-sized acquisition like earlier in the year). 5. Mayer Discloses 800MM MAU – In early September, CEO Marissa Mayer commented that the company had reached 800MM MAU not including Tumblr, which represents growth of 20% since July of 2012. We have not gotten consistent MAU disclosure over time, but this seems like a positive early indicator for Yahoo!.

Among the points of focus tomorrow will no doubt be the prospects for a tax-efficient divestiture of Yahoo!’s investment in Alibaba Group Holding, the Chinese e-commerce giant whose stock is expected to go public sometime soon.

Stifel Nicolaus‘s Jordan Rohan, who rates the stock a Buy, sees a $41 valuation for the shares assuming a worst-case scenario in which the stake is fully taxed, along with the company’s stake in Yahoo! Japan.

However, Rohan sees three scenarios for what may happen to both stakes since management said it was thinking about how to do such a tax-efficient spin. One scenario is a so-called cash rich split, though he believes it’s unlikely “due to the magnitude of the gains that Yahoo may be trying to shield.” A stock dividend “makes sense financially,” providing Alibaba lists its shares in the U.S., not in China. And Thirdly, a “spin” of both Alibaba and Yahoo! Japan is the most interesting prospect:

This is the most intriguing of the scenarios, in our view. It achieves tax efficiency and, simultaneously, enables Yahoo’s domestic and international businesses/stakes to be buyable for private equity and strategic buyers. There are still some challenges here, but the upside could be quite compelling.

A tax-efficient divestment of both stakes would add $11 to Rohan’s $41 target, he writes.

In a somewhat less sanguine vein, BGC Capital‘s Colin Gillis reiterates a Hold rating on the stock today, writing that after a 71% rise in the shares this year, he warns investors who are holding onto the stock that they may have to sit through more soggy quarters from Yahoo! before they get cashed out of Alibaba, and that the stock could retrace its 50-day moving average:

Investors who own shares of Yahoo as a proxy for Alibaba may find that they have to hold shares through at least three more Yahoo lackluster earnings results. The growth outlook for Alibaba may start to slow as the comparisons become more difficult. We estimate revenue growth at 54% YoY for Alibaba revenue of $1.7 billion, compared to 72% YoY revenue growth in the prior quarter. While we understand the excitement around Alibaba and its growth prospects, we also mention that Alibaba’s recent financial data is very limited. It is possible that if the company issues a detailed prospectus ahead of an offering, that the financial details may be more sobering than the currently available headline metrics. We also mention that investors should not rule the possibility that Alibaba may seek a more modest initial valuation- as Yahoo’s 12% stake that gets sold on offering could provide a basis for the majority of its initial floatation. Finally, Yahoo’s stock is meaningfully above its 50-day simple moving average – currently at $29.85, and has shown a repeated pattern of returning to touch this average throughout the year.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit